The virtues and sins of PPP have been so widely, all but exhaustively, discussed, that I couldn’t presume to add much to the debate in a few lines, but I would suggest you approach PPP with an attitude along the lines of “Averages (even honestly calculated averages) mislead.”
Headcount, or number of lawyers per firm, ought to be, if we think about it non-reflexively, something we would be well to be of two minds about. On the one hand, the higher your total headcount, the more your firm is a force to be reckoned with. Heavyweights are taken more seriously than middleweights who are taken more seriously than welterweights.
But on the other hand, counting heads is a fairly blunt instrument, somewhat like evaluating global cities primarily by the size of their overall population. It’s germane, of course, but far from what we’re really interested in: The business community, strong and weaker industries, the rule of law and the regulatory burden, the population’s education and skills, the residential and architectural and transportation infrastructure, the performing arts and cultural scene, restaurants and shopping, the climate. Population ends up a footnote.
RPL is the most interesting: It’s probably my “desert island” metric. Consider:
- It’s tough to game. Both revenue and number of lawyers are what they are.
- If you want to game revenue, there may be spectacular consequences, as we’ve learned from a recent high-profile implosion. (As a former securities lawyer, I think I can say without fear of contradiction that every single major financial scandal of the past several decades has had revenue recognition misrepresentations as a core part of the fraud.)
- And the number of lawyers is pretty much the number of lawyers
- RPL is in some rough and ready sense a proxy for quality in the he eyes of your clients. The more they’re willing to pay to rent one of your lawyers for a year, the more valuable they presumably find what you do. If you doubt me, the firm with year after year the highest reported RPL is Wachtell.
Which brings us to topline revenue.
It’s time to ask whether its importance hasn’t become over-rated. To those of you who might think it’s the number one metric above all others, I invite you to reconsider. I believe there’s a lot less there than meets the eye.
- Bald revenue numbers obscure the highly material impact of creeping increases in (a) inflation; and (b) headcount growth. Over just the last five years, these two factors have grown at a combined rate of just shy of 25% for the AmLaw 100. In other words, that’s how fast the “average” AmLaw 100 firm would have had to grow just to stay even in real performance terms. (See CAGR for Dummies.)
- We all know that there are quick and easy ways to juice revenue fast and that it’s of a different order of magnitude, challenging and demanding, to grow it in ways that endure. The raw numbers don’t reveal which is which. For example, Asian markets are notorious for their seemingly inexhaustible capacity for generating revenue without profits. But judiciously targeting carefully curated laterals with meaningful potential but modest books, and integrating them into the firm and cultivating their potential over a matter of years—that takes time and dedication.
This was pithily summed up to me by one managing partner I was meeting with a few weeks ago who expostulated that “I could grow our revenue by $50-million this quarter if I felt like it—and lose plenty of money on it.”
Bruce, you have done it again! A recent example is Dell Computer’s revenue for laptops is huge and their profit is so small it is a grain of sand on the beach of technology.
The law firms have been timing the high jump. Measuring raw hours and revenue when as you clearly point out misses the reason to be in business. Great article.
while it’s true law firms are wise to focus on profit – without revenue, there is no chance to do so. The tenor of the piece seems to suggest law firms are effective at generating top-line revenue. They’re not even close to being effective. I don’t believe there’s a single AmLaw 100 law firm with a dedicated sales force. Kent Zimmermann outlined recently on Bloomberg Law why firms ought to emulate the business practices of GE. Well GE has a crack sales force and rewards their sales employees handsomely. What is missing in this analysis and every analysis I ever read about revenue vs profit and efficiency – is a sober assessment of what firms are doing to generate revenue. And frankly, in the AmLaw 100 – there are essentially zero sophisticated efforts aimed at generating top-line revenue. I myself worked in an overseas capacity for an AmLaw 100 law firm sales division that no longer exists. I know from personal, first-hand experience what those efforts do to add 8 figure new, greenfield top-line revenue to an AmLaw 100 law firm. A focus by legal sector consultants like yourself on how firms can generate top-line revenue effectively is long, long overdue. This would save BigLaw. There is no question about it. But firms aren’t going to listen to one lone commentator like myself. It needs more than one. And I’d encourage you to pursue this. I’d be happy to discuss it anytime.
I’d like to suggest, and have sometimes attempted to calculate, a metric that’s related to RPL but seldom used. (I’ve never seen it in print.) It’s profits per lawyer — not profits per partner (PPP), but profits per lawyer (PPL). Take the partner profits, add the associate salaries, and divide by the number of lawyers. The quotient is the average income per lawyer at the firm, without regard to status as an owner or a serf.
It removes the opportunity to game the system that PPP offers, because PPL doesn’t change as lawyers join the partnership or are de-equitized.